Horizontal analysis is when an individual looks at the income statement of a company and compares one year to the other to see what kind of percentage it has increased or decreased within the different departments in a company for any given time period. When looking at Competition Bikes (CB) and performing a horizontal analysis, we would take a look at first year 6 and year 7. Between year 6 and 7 there was an increased net sales of 33.3%. This means that from year 6 to year 7 there was a great increase. This means that the customers were happy with the product being sold, and this is a sign of strength within the company. It was a profitable year.
For year 6 and 7 the cost of goods sold also went up 31.8%. This number is to be expected. Since the net sales went up, obviously the cost of goods sold will also go up. This also means that CB’s purchasing department was able to keep the cost of goods sold down. If the net sales had been lower than the cost of goods sold, then there would have been a problem. The best numbers to look at when comparing year 7 to year 6 is the gross profit. The profit difference during these two years was 37.5% that is a good gross profit. This means several things, the first being that the company grew, that the customers were happy with the product, and that management did a good job in promoting its product.
The operating expenses shows why there was such a great increase in gross profit. Their advertisement department spent 37.5% more on year seven than they did on year six. This simply means that CB spent a lot of money in advertising. The advertising department had more money to spend because the company made more money that year.
Sales commissions also were up 33.3% in year 7 from year 6. This is a positive trend for CB because the sales personnel should be awarded commissions from having such a high year in sales. This will also ensure that the sales department will keep its employees happy, and they wont try to look for a job at a different company. The total of selling expense for CB increased 33% in year 7 from year 6. It looks like CB invested good amounts of money knowing that it will see good returns for profit that year.
Administrative salaries increased 21.4% in year seven from your six. This is always a good thing, knowing that good administration will be compensated. The executive compensations also went up 29.4%. If you have a positive year for the increased of gross profit is 37.5%, it would be noted that the hard work of the executive should be compensated and that should also trickle down to the administrative salaries.
The total general and administrative expense a rose 20.4% in year seven from year six. This is not necessarily a bad thing, but when expenses rise, it can be considered a good strength. It would be good for CB to find ways to keep these expenses down specially from increasing every year, but when you have a productive year as you do in year 7, you will expect for general and administrative expenses to go up.
The total operating expense went up 23.9% from year 6 to years 7. This is quite a hike, but any time that there is a great increase in net sales and gross profit, you can expect a hike in the operating expenses. When looking at the over all big picture of what is happening at CB, we can conclude that this hike is normal in the operating expenses. It would be a bad thing is CB had an increased of 23.9% in its total operating expenses and then if we looked at the net sales of the gross profit and see that there was not a hike in those areas. But since there was an increase in net sales gross profits, we can also conclude that there would be an increase in total operating expenses.
Operating income is a measure of a firm’s profit that excludes interest and income expenses. In the case of CB there was a gain of 154.6% from gear 6 to year 7. This is a healthy increase for CB.
Net earnings for CB...